When QROPS were first introduced in 2006, the idea was to enable the growing number of expatriates and foreign UK pension holders to remain close to their savings upon leaving the British Isles. Since the introduction of the legislation, 44 jurisdictions have emerged offering 3,650 qualifying schemes.
The appeal of QROPS has increased significantly year-on-year, and this is for a multitude of reasons. Of course the Treasury dislikes seeing money leave the UK, and as such has tried to match many of the benefits QROPS offer within its own pension reforms, but as more UK residents look for fresh pastures, better climates, more money, an improvement in lifestyle etc
UK Legislation Changes
The UK pension model laid largely untouched – save for a few amendments to contributions tax structure – for 100 years until the burgeoning sense of overwhelming liability hit home. The increasing pension deficit has forced the government to introduce an array of reforms aimed at trying to claw back some of the shortfall, and with more measures inevitably in the pipeline it is an uncertain time for those with plans for retirement that depend on stability in the pension market.
The reforms of 2014 – set to be fully introduced in April 2015 – have, for the most part, made UK pensions a more attractive proposition. Many of the benefits offered to the UK’s expats in overseas pension schemes have been replicated with the express intention of trying to encourage those with significant sums invested in the UK to keep them invested there, but there is a sense of government desperation surrounding these changes. The future of the UK’s economy and pension sector is of real concern to those with both a vested interest in it, and the option to be removed from it. For many, the idea of assessing the options available is a no-brainer.
So while there will be unparalleled freedom extended to those choosing to keep their pension in the UK, if the saver currently lives overseas and plans eventually to retire abroad, it would be a strange choice not to consider transferring into a QROPS.
The general UK pension pot is in huge deficit, it’s a deficit which jumped by 50% across the top FTSE 350 companies in just two weeks last October, and it’s a deficit which most see as being beyond the realms of being able to be hauled back. People are living longer – therefore needing a pension pot which lasts longer – investments have gone awry, and profitability across so many companies offering defined benefit schemes has slumped (particularly on the high street), it means the only logical ways to attempt to claw back the deficit involve fast tracking the proposed extension of the retirement age, increasing contributions, the gradual and subtle reduction of benefits over the course of time, and of course, to try to make the UK pension market a more attractive (on the face of it) prospect to investors who may otherwise look to take their money and run. It’s a torrid looking situation, and that’s before we even look at the public sector.
So in order to improve the UK pension model and to attempt to dilute the appeal of QROPS to expatriates (a large amount who have extensive savings locked into a scheme within the UK), the government introduced some intriguing legislation proposals in April 2014. These included:
The scrapping of the requirement to buy an annuity (effective immediately)
One of the core elements of appeal for QROPS previously was the freedom to invest in whichever asset class one wished. The requirement to purchase an annuity upon retirement was always a source of great consternation for savers, and the removal of this requirement was received very well (except by annuity providers) which gave the government the encouragement they needed to proceed with extra measures.
100% access upon retirement (effective April 2015)
A fiercely debated piece of legislation, the 100% access rule allows the saver to withdraw their pension in its entirety upon retirement, 25% of which will be tax free with the remaining 75% taxable at the marginal rate. While this apparent benefit (a benefit offered to expats by numerous New Zealand pension schemes, resulting in them being banished from the HMRC QROPS list some time ago) may appeal to some, it is generally regarded as an unwise move to withdraw an entire lifetime’s worth of savings in one fell swoop. That said, the green light has now been given for QROPS to re-introduce this benefit, although exactly how the tax will be administered is still being debated. The idea that expats may be able to access 100% of their funds, 100% free of any tax (depending on jurisdiction and residency) is a source of much aggravation for the Treasury, and as such, rules are in the process of being drawn up to ensure that this option is dealt with properly.
The 55% death tax on pensions has been abolished
Another feature originally offered by QROPS, replicated for the benefit of the British public. If you die and are under the age of 75 the remaining funds will be transferred to the designated beneficiaries completely free of tax, if, however, you have surpassed the age of 75, the beneficiaries will be taxed at their income tax rate on the remainder of the funds due.
These changes apply in main to those with defined contribution funds – meaning the public sector and any other savers in a defined benefit fund must transfer their pension into a DC scheme to enjoy these new found freedoms. Unfortunately for DB savers, transfers will no longer be allowed (except for in “exceptional circumstances”) as of April 2015, meaning that come what may, they are locked permanently into the turbulent UK pension market with no real control over their retirement plans.
This means that those working within any area of the public sector (firefighters, Police, university employees, teachers, NHS and military etc….) will no longer be allowed to take a QROPS if they live or plan to move abroad. Already pension cuts have been witnessed across the sector, and the likelihood of being made to work at least five years extra is now more or less a reality most are beginning to face up to.
There are plenty more uncertain aspects of the UK pension market, which have in effect cancelled out any positivity felt after the extension of pension freedoms. The sad truth is that many of the new generation of employees will either never have a pension, or will simply take a look at the current model and decide there is more value in storing cash under the mattress.
Good News for QROPS
For pension providers operating across the world for the benefit of UK expats, the uncertainty has triggered a huge uplift in UK pension holders enquiring about the possibility of transferring their funds into a more stable and tax-efficient model.
There were those throughout the industry who worried that the government would ensure that their measures diluted the appeal of overseas schemes, therefore keeping vital pension funds onshore. But while they have certainly managed to match up to QROPS in some respects, there are far wider benefits associated with QROPS than can be found anywhere in the UK.
What is a QROPS exactly?
A Qualifying Recognised Overseas Pension Scheme. To become a QROPS, a pension scheme must meet an increasingly stringent set of HMRC rules. If a pension scheme appears on the HMRC QROPS List, it has declared itself as a scheme which qualifies, meaning that UK-based schemes can be transferred into it without fear of what is known as an unauthorised payment charge. This charge will be imposed upon a pension pot which has been placed into a scheme that does not qualify. The charge adds up to 55%. It is extremely important that financial advice is taken before placing a pension into a particular scheme, and that due diligence has been done. If the pension scheme is established and in a well-regulated jurisdiction, it’s unlikely there will be a problem in this regard.
The Key Benefits
Two of the key selling points of a transfer into a Qualifying Recognised Overseas were formerly the fact that there was no requirement to purchase an annuity, and the benefit of knowing 100% of the remaining funds would be passed onto the designated beneficiaries upon death. Now these have been matched in the UK, we must look elsewhere for the advantages of a transfer, but you don’t have to look too far:
Placing the pension into the right jurisdiction from the start is very important. The important factor when it comes to ensuring tax-efficiency is to find a scheme in a jurisdiction that has the relevant tax treaty in place with the country in which you plan to retire. Tax breaks are available and can be sought through the knowledge of an experienced QROPS adviser, but knowing where you plan to retire – or at least finding a scheme which offers multi-jurisdictional benefits – is key to tax efficiency. Those with large or multiple pension pots in the UK, can save substantial amounts in tax on pension income with careful jurisdiction selection.
Overseas schemes offer a far broader range of appetite-appropriate investment choices than those available in the UK. The flexibility of a QROPS is such that the level of investment and the asset class options can be tailored specifically to meet the demand for growth of the fund. If you wish to see your pension pot grow annually, you have to invest. It is that simple. But exposure to risk can be mitigated by diversification, and access to global investment platforms without the restrictions in place in the UK gives the potential for self-managed control and review if required. The recommended split of a QROPS fund is 80% invested, and 20% cash. The goal should be to utilise the extensive investment options in order to secure growth, if this were not the case, most would just place their money into a savings account with a 1% interest rate.
Lump Sum Flexibility
In the UK, the tax-free lump sum available is 25%. In a QROPS, this can reach 30% with the remainder set to be available for instant withdrawal at the local tax rate, which in many jurisdictions is nominal. So while a 100% lump sum withdrawal is available for a UK pension, the appeal of a 100% withdrawal in a different jurisdiction with a more attractive tax rate is difficult to avoid.
Just as you are now able to treat your pension like a virtual bank account in the UK (withdrawing as and when you please), the same legislation has also been passed in the majority of overseas jurisdictions. Income flexibility is now at a premium, savers want the power to be able to decide how much they take, and when, and schemes everywhere have been redesigned to cater for this. From 100% instant withdrawal, to quarterly drawdown, the options once retirement age is reached have never been so comprehensive.
Avoiding Currency Fluctuations
If you leave your pension in the UK, when the time comes to draw on your savings, you will be exposed to the risk of a potentially unfavourable exchange rate. If the British pound is underperforming at the time of transfer, you could lose substantial amounts simply by drawing your pension. It’s another area of uncertainty which can be laid to rest by transferring into a QROPS. Most schemes offer an array of currency choices, and by selecting the currency specific to the country you wish to retire in, you have no reason for concern over the volatility of the currency market.
Convenience and Portability
QROPS are designed specifically for expats, as such most are constructed to allow the saver to move countries without disruption to the underlying investments, and with minimal or no charges for transferring between jurisdictions. This is something which should be covered off before selecting a scheme as the rules vary across providers.
A large number of expats find they may have multiple UK pensions (some which they may have forgotten about), this can make it difficult to keep tabs on the performance of each individual pot, a QROPS allows for multiple pensions to be transferred into a singular scheme, enhancing the performance and becoming easier to manage.
As well as the aforementioned specific benefits, there is also the undeniable peace of mind offered by having a lifetime’s worth of savings removed from the UK market, which has for some time been teetering on the edge.
Because of the influx of confirmed transfers over the last 12 months, many new financial services providers are entering the QROPS market, and this is why it’s so important to seek professional advice. New jurisdictions keep appearing on the HMRC QROPS list, and more are set to follow suit.
But while countries like Kosovo, the Falkland Islands and Iceland are all relatively recent additions to the QROPS market, it is actually the heralded entrance of Jersey which has caused the most excitement. Jersey has always offered QROPS, but only to those residing there. So while Jersey residents with a UK-based pension were able to benefit from the tax regulations and security offered by the financial hub, internationally it was a proposition not available. This is not the case now, and already we are seeing huge interest in the schemes offered by the Channel Island.
For those planning to retire in the US, Malta provides the answer to an often debated and complex question: How can I get my pension into the USA without severe tax implications? The double taxation agreement between Malta and the US makes it possible for any resident holding a pension on the Mediterranean island to take their pension without tax on both exit and entry. Products that cater for this were designed by US and European tax lawyers in collaboration with pension providers to ensure they were fit for purpose, since then Malta has emerged as the most popular destination for QROPS, mainly due to the US market.
For those residing elsewhere, New Zealand, Ireland, Australia and Gibraltar are all popular options, but each jurisdiction has specific benefits that work well with certain retirement destinations. It is impossible to be general regarding this, rule changes and new scheme introductions mean that only a QROPS specialist will be able to identify the appropriate destination in the best interests of the individual.
HMRC QROPS List
A common misconception is that because a QROPS appears on the HMRC list, it qualifies. This is most certainly not the case, and the list is merely designed to serve as a guide for advisers. They will initially check the list, and if the scheme is listed, they will carry out in-depth due diligence to be sure that the scheme meets the requirements imposed by HMRC.
Finding the Perfect Match
The right provider, scheme and jurisdiction exists for everyone, and making sure that these are sourced effectively will mean that the entire process is simplified, and the benefits offered are understood. Much of this revolves around the standard of advice offered, but it would also be advisable to conduct some research of your own in advance of any kind of consultation. A financial adviser will usually offer a variety of options with slightly different benefits, and will provide all the information necessary to make an informed decision. It is ultimately up to you to make sure you are happy with your choice.
Regulation is specific to each jurisdiction, hence places like Malta, Jersey and Gibraltar are favoured as their regulations mirror the UK’s very closely. General regulation and monitoring of QROPS – as well knowledge on the rules – has dramatically improved since the early years, and now there is an air of confidence about those advising on the schemes which was perhaps missing before.
Some high profile scheme closures and jurisdiction bans were witnessed in the first four or five years, mainly due to particular schemes attempting to test the boundaries or pleading ignorance to updated rules, but now there seems to be a far more cohesive look to the industry, a look which has developed naturally as the product becomes more familiar, and more transfers are performed.
How does a QROPS actually work?
A QROPS will have a nominated Trust, which will be cost-effective, tax-efficient and safe. The funds will be kept within the secure trust and used to purchase an Offshore Personal Portfolio Bond (OPPB), which acts as a wrapper containing the spread of diversified investments designed for growth. The Trust will be based in the jurisdiction in which the QROPS is held, and will be responsible for the proper management of the funds it holds.
When is a QROPS not Appropriate?
There a few cases when it would be unlikely that a QROPS would provide a worthwhile avenue for exploration. If you have no plans to leave the UK is the obvious one, but a QROPS may also not be a good option depending upon what you plan to do with your money. The size of the pension you have available is also important when deciding if a QROPS is the right way to go. A single pension of a relatively low value may be best off left where it is, however two or more modestly sized pensions will often benefit from the consolidation offered by a QROPS transfer.
The only other real consideration must be towards the associated benefits you receive with your UK pension. Benefits are not transferrable, so it’s extremely important to weigh up the benefits against the sacrifices you may have to make.
If you have a UK-based pension but no longer live there, or you plan to move overseas within the next 12 months, consideration should be given to a QROPS. Even if you have an existing financial adviser in the UK and you inform him of your plans to leave the country, he should recommend that you explore the potential benefits a QROPS offers. It is always best to take advice from someone who handles these transfers with regularity, as they will be able to highlight the main factors to be considered, while also having knowledge of the latest relevant information.
This article has been created to provide an overview of the UK’s pension market, the reforms that have been introduced and the potential benefits available to expatriates by transferring to a QROPS. This article is general, and as such is not intended to be referred to as advice. To get tailored guidance specific to the requirements of the individual, a fully qualified financial adviser with extensive experience of QROPS must be consulted.